A charitable gift annuity allows you to donate money to a non-profit, such as your alma mater. Planned giving can include charitable gift annuities. You can give back and get tax benefits. Meanwhile, you’ll receive an additional stream of income for the rest of your life. Here’s how to set it up and benefit from it.
A financial advisor can help you create a financial plan for your charitable needs and goals.
What Is a Charitable Gift Annuity?
A charitable gift annuity lets a donor make a donation and receive fixed annuity payments for the rest of their life. Either an individual or a couple can donate. The charitable gift annuity serves as a contract between the donor and the charity.
The donor makes a large gift to a charity, usually cash or securities. However, some donate real estate or other large financial assets. As a result, the donor can take a partial tax deduction for their donation. Meanwhile, the charity gives them a fixed stream of income for the rest of their life.
Charitable gift annuity donors are usually older, retired, and looking for an additional income stream in retirement – with the added bonus of getting to donate to charity.
How It Works
Many large nonprofit organizations offer gift annuities, especially colleges and universities. Your first step will be confirming that the group you want to donate to offers charitable gift annuities.
Assuming they do, your next step is to make the sizable donation you have planned. The minimum amount you can give to qualify for a charitable gift annuity is usually $5,000 or $10,000. However, many charitable gifts are usually worth much more than that.
The charity then sets your gift aside in a reserve account and invests it or puts it in an account that accrues interest. You receive a scheduled, fixed monthly or quarterly payout, usually supported by your original donation, for the rest of your life. After you die, the charity then gets to keep the rest of the gift.
The upside is that you get to give money to charity and get a steady, albeit small, income for the rest of your life. However, most of the time, you don’t get any inflation protection with charitable gift annuities. With a regular annuity, you can often pay extra or receive smaller payments at first, in exchange for inflation-adjusted payments. If you’re going to receive payments for the next 20 or 30 years, the real value of a $100 or $1,000 annuity check will be a lot less than it is today.
The amount of money you get each month or quarter depends on your age when you set up the annuity. If you are relatively young, and therefore likely to collect more payments, they will be smaller. However, if you are older, and therefore likely to pass away sooner, the payments will be larger. If a couple sets up a charitable donation, the same process applies, except the charity must wait until both spouses pass away to receive the remainder of the gift.
Charitable Gift Annuities and Taxes
Annuitants – those who benefit from the annuity – can take a tax deduction when they give the original gift. The deduction depends on the estimated amount that will actually go to charity after all annuity payments are made.
The charity will work with the annuity provider to estimate the donor’s life expectancy. Depending on that estimate, the donor may receive partial annuity payments tax-free for a period of time.
The Internal Revenue Service (IRS) breaks down the charitable gift annuity down into two components. The first is the contribution to the charity, which the IRS views as a charitable donation. The second part, the donor’s investment, generates payouts.
Meanwhile, a charity may let you donate long-term appreciated stock or other property in place of cash. In that case, you may reduce or eliminate the capital gains you’d pay if you sold these assets before donating their proceeds. The same applies if you donate long-term appreciated securities or personal property to any public charity that can accept then.
However, part of your annuity income is taxable at the federal level. It’s also taxable at the state level if the state you live in has an income tax. Consider talking to a financial advisor or tax specialist who has experience with charitable gift annuities before you sign any documents.
Charitable gift annuities can help you donate to the charity or school of your choice. It also financially benefits you through a tax break and an annuity. However, remember that your payments are only as secure as the finances of the school or charity you’re donating to. If the institution goes bankrupt, your annuity disappears, so do your research beforehand.
Consider speaking to a financial or tax advisor before using a charitable gift annuity. The tax break might not outweigh earnings you could make with the initial lump sum. However, it might be worth it if you want to give back to your school or favorite cause.
Tax Planning Tips
- A financial advisor can help you set up a charitable gift annuity and make the most of your tax benefits. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- If you’re trying to figure out how much you’ll get back or spend on taxes, SmartAsset’s free tax return calculator can help you with your estimate.
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